SEC News Digest

Issue 2012-167 August 28, 2012

Enforcement Proceedings

SEC Charges Eight in Georgia-Based Insider Trading Ring

The Securities and Exchange Commission today charged eight individuals living in the Griffin, Ga., area for their involvement in an insider trading ring that generated more than $500,000 in illegal profits based on nonpublic information about an upcoming company merger.

The SEC alleges that local accountant Thomas D. Melvin, Jr. exploited confidential information from a client who was on the board of directors at Chattem Inc., a Tennessee-based pharmaceutical company known for such over-the-counter products as Allegra, Gold Bond, and Icy Hot. In late 2009, after Chattem’s board was informed that French pharmaceutical manufacturer Sanofi-Aventis Inc. made a tender offer to purchase the company, Melvin’s client sought his professional advice on the financial impact of his Chattem stock options being involuntarily exercised due to a change in control of the company. Melvin breached his duty of confidentiality to the client and proceeded to tip four of his friends and associates about the likely increase in the company’s stock price as a result of the impending transaction. Those individuals then knowingly traded on the confidential information ahead of the public announcement of the merger, and some even tipped others who traded illegally as well.

Four of the eight men agreed to settle the SEC’s charges and pay back all of their ill-gotten gains plus interest and penalties for a combined total of more than $175,000.

“It is particularly troubling when professionals like Melvin violate their professional obligations and breach a client’s trust by misusing confidential information,” said William P. Hicks, Associate Director for Enforcement in the SEC’s Atlanta Regional Office. “These traders similarly jeopardized their reputations or careers by trading on information that was off-limits.”

According to the SEC’s complaint filed in federal court in Atlanta, the Chattem board member made clear to Melvin during their private conversations and meetings that the topic of discussion was confidential. The board member shared the likely increase in stock price ($20 to $25 per share) from the pending transaction as well as its potential timing. Nevertheless, Melvin illegally tipped three friends and a partner at his accounting firm Melvin, Rooks, and Howell PC.

The SEC alleges that each of Melvin’s four tippees traded on the nonpublic information:

C. Roan Berry — Melvin’s friend who lives in Jackson, Ga.

Michael S. Cain — Melvin’s friend who lives in Griffin, Ga.

Joel C. Jinks — Melvin’s friend who lives in Griffin, Ga., and was a one-time candidate for local sheriff.

The SEC alleges that Berry tipped his friend and neighbor in Jackson, Ashley J. Coots, who in turn tipped his friend and former co-worker Casey D. Jackson, who lives in Atlanta.

The SEC alleges that Cain, who works at a brokerage firm, tipped his friend Peter C. Doffing, who lives Milner, Ga. and purchased out-of-the-money call options based on the nonpublic information.

The four traders settling the SEC’s charges agreed to pay back all of their ill-gotten gains plus interest and penalties:

Berry agreed to pay disgorgement of $55,091.51, prejudgment interest of $4,860.37, and a penalty of $55,091.51.

Coots agreed to pay disgorgement of $17,360.43, prejudgment interest of $1,565.48, and a penalty of $13,231.80.

Jackson agreed to pay disgorgement of $2,369.78, prejudgment interest of $221.93, and a penalty of $1,184.89.

Rooks agreed to pay disgorgement of $18,482.14, prejudgment interest of $1,432.68, and a penalty of $4,620.54. Rooks also will be prohibited from appearing or practicing before the SEC as an accountant under SEC Rule of Practice 102(e). The terms of Rooks’ settlement reflect credit given to him for his cooperation and substantial assistance to the investigation.

Berry, Coots, Rooks agreed to be permanently enjoined from violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3. Jackson agreed to be permanently enjoined from violating Section 10(b) of the Exchange Act of 1934 and Rule 10b-5. All four neither admit nor deny the allegations, and their settlements are subject to court approval.

The SEC will proceed with its litigation against Melvin, Cain, Doffing, and Jinks.

The SEC’s investigation was conducted in its Atlanta Regional Office by Staff Attorney William S. Dixon and Senior Trial Counsel Kristin Wilhelm under the supervision of Assistant Regional Director Aaron W. Lipson. Ms. Wilhelm will lead the ongoing litigation.

The SEC thanks the Financial Industry Regulatory Authority (FINRA) and the Chicago Board Options Exchange (CBOE) for their assistance in this matter. (Press Rel. 2012-167)

Commission Declares Decision as to China MediaExpress Holdings, Inc. Final

The decision of an administrative law judge with respect to China MediaExpress Holdings, Inc. (China Media), has become final. The law judge found that China Media violated 13(a) of the Securities Exchange Act of 1934 and Rules 13a-1 and 13a-13 by its failure to timely file an annual report on Form 10-K for 2010, and other required periodic reports since November 2010, when it filed a Form 10-Q for the period ended September 30, 2010.

The law judge noted that China Media’s violations were recurrent and egregious in that they have continued from November 9, 2010, to the present. The law judge further noted that, when China Media’s auditors determined that continued reliance should not be placed on its 2009 audit, it deprived its investors, for the nearly three years that it has existed as a corporate entity, of its audited financials statements. The law judge found that it is in the public interest to revoke the registration of China Media’s registered securities. (Rel. 34-67735; File No. 3-14799

Commission Declares Decision as to ProElite, Inc. Final

The decision of an administrative law judge with respect to ProElite, Inc. has become final. The law judge found that ProElite, Inc. violated Section 13(a) of the Securities Exchange Act of 1934 and Rules 13a-1 and 13a-13 by its failure to timely file some, but not all of its required periodic reports. ProElite, Inc.’s most recent filing was a Form 10-Q for the period ended September 30, 2008, and a Form 10-K for the period ended December 30, 2008, which were both filed on November 21, 2011.

The law judge granted ProElite an extension of time in order to become compliant in their filings, but at this present time, there is no indication that they have done so. The law judge found that it was necessary and appropriate for the protection of investors to revoke the registration of each class of the registered securities of ProElite, Inc. (Rel. 34-67736; File No. 3-14806)

In the Matter of Ryan Mark Reynolds; Reynolds Consents to Collateral Bar

The Commission issued an Order Making Findings and Imposing Remedial Sanctions Pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Order) against Ryan Mark Reynolds of Dallas, Texas. Reynolds consented, without admitting or denying the Commission’s findings, to be barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; and to be barred from participating in any offering of a penny stock, including: acting as a promoter, finder, consultant, agent or other person who engages in activities with a broker, dealer or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock.

These proceedings instituted on April 24, 2012, were based on an April 10, 2012, amended judgment that enjoined Reynolds and others from violating Sections 5(a) and 5(c) of the Securities Act of 1933, and Section 15(a) of the Securities Exchange Act of 1934 in a civil action entitled Securities and Exchange Commission v. Phillip W. Offill, Jr., et al., Civil Action Number 3:07-CV-1643-D (N.D. Texas). In the Order, the Commission found that the Commission’s complaint alleged that Reynolds, a person formerly associated with a broker-dealer who was barred from the securities industry, engaged in a scheme to evade the registration requirements of the federal securities laws by offering and selling the securities of six companies when no registration statements were filed or in effect for his sales transactions. The Commission’s complaint also alleged that Reynolds acted as an unregistered dealer by engaging in the business of underwriting public securities offerings and engaged in the regular business of effecting transactions in securities by buying and selling securities for his own accounts. The Order also found that Reynolds was not registered or associated with a broker or dealer during the time when he offered and sold the securities at issue in the case. In the civil case, Reynolds was ordered to pay disgorgement and prejudgment interest totaling $9,342,498.71, and a civil penalty totaling $120,000.

The Securities and Exchange Commission announced today that the United States District Court for the District of Utah entered a final judgment against Jeffrey L. Mowen, ordering Mowen to disgorge $8,041,779 in ill-gotten gains and $1,964,203.67 in prejudgment interest. The Court also ordered Mowen to pay a civil penalty of $8,041,779, for a total of $18,047,761.67. The Court further enjoined Mowen from future violations of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933.

The SEC Complaint alleged that Mowen operated a Ponzi scheme that was fed through investor funds raised by another defendant, Thomas Fry. Fry, in turn, raised funds through other defendants, Fry’s promoters, via the unregistered offer and sale of high-yield promissory notes. According to the Complaint, the scheme raised over $40 million from over 150 investors in several states, over $18 million of which was funneled to Mowen. Mowen never invested the funds, instead misappropriating over $8 million to support a lavish lifestyle.

On May 4, 2011, Mowen pled guilty to committing wire fraud in a related criminal action and is currently serving a ten year prison sentence. United States of America v. Mowen, Case No. 2:09-cr-00098-DB (D. Utah).

A final judgment ordering disgorgement and penalties against Fry and several of his promoters was entered on June 15, 2012. [SEC v. SEC v. Jeffrey L. Mowen, et al., Case No. 2:09-cv-00786-DB/PMW (D. Utah)] (LR-22459)

SEC Charges Former Sky Bell Hedge Fund Manager With Making Misrepresentations in Selling and Recommending His Hedge Funds

On August 27, 2012, the Securities and Exchange Commission filed a settled civil action in the United States District Court for the Northern District of California against Gary R. Marks. The Commission’s complaint alleged that Marks managed and recommended various fund of funds hedge funds through Sky Bell Asset Management, Inc. (an investment adviser formerly registered with the Commission), including the Agile Sky Alliance Fund that was co-managed with the Agile Group, PipeLine Investors, Night Watch Partners, and Sky Bell Offshore Partners (collectively Sky Bell Hedge Funds). The Commission’s complaint alleged that between at least 2005 and September 2007, Marks negligently misrepresented the level of correlation and diversification among certain Sky Bell Hedge Funds.Furthermore, the Complaint alleged that between at least 2005 and 2008, Marks also: a) made unsuitable investment recommendations to certain advisory clients to invest most of their investment portfolio in Sky Bell Hedge Funds, b) negligently failed to disclose that PipeLine Investors invested significantly in a purported subadviser’s fund, and c) negligently provided misleading information to certain investors about the liquidity problems at the Agile Sky Alliance Fund.

Without admitting or denying the allegations in the Commission’s complaint, Marks consented to the entry of a proposed Final Judgment enjoining him from future violations of Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8 promulgated thereunder, and Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. The proposed Final Judgment also orders Marks to pay disgorgement of $321,702, a penalty of $100,000, and prejudgment interest. The proposed settlement is subject to the approval of the district court. For additional information, contact Don Hoerl (Regional Director) or James Scoggins (Assistant Director) in the SEC’s Denver Regional Office at 303-844-1000. [SEC v. Gary R. Marks, Civil Action No. CV-12-4486-JSC(N.D. Cal.)] (LR-22460)

Self-Regulatory Organizations

Immediate Effectiveness of Proposed Rule Change

A proposed rule change filed by NYSE Arca, Inc. relating to the First Trust CBOE S&P 500 VIX Tail Hedge Fund (formerly, the First Trust CBOE VIX Tail Hedge Index Fund) (SR-NYSEArca-2012-90) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication in the Federal Register is expected during the week of August 27. (Rel. 34-67732)

Approval of Proposed Rule Change

The Commission has approved a proposed rule change (SR-OCC-2012-11) filed by The Options Clearing Corporation (OCC) under Section 19(b)(2) of the Securities Exchange Act of 1934 relating to the auction process under Options Clearing Corporation Rule 1104. Publication in the Federal Register is expected during the week of August 27. (Rel. 34-67733)

Securities Act Registrations

The following registration statements have been filed with the SEC under the Securities Act of 1933. The reported information appears as follows: Form, Name, Address and Phone Number (if available) of the issuer of the security; Title and the number and/or face amount of the securities being offered; Name of the managing underwriter or depositor (if applicable); File number and date filed; Assigned Branch; and a designation if the statement is a New Issue.

Amendments to the Registrant's Code of Ethics, or Waiver of a Provision of the Code of Ethics

5.06

Change in Shell Company Status

6.01

ABS Informational and Computational Material.

6.02

Change of Servicer or Trustee.

6.03

Change in Credit Enhancement or Other External Support.

6.04

Failure to Make a Required Distribution.

6.05

Securities Act Updating Disclosure.

7.01

Regulation FD Disclosure

8.01

Other Events

9.01

Financial Statements and Exhibits

8-K reports may be viewed in person in the Commission's Public Reference Branch at 100 F Street, N.E., Washington, D.C. To obtain paper copies, please refer to information on the Commission's Web site at http://www.sec.gov/answers/publicdocs.htm. In most cases, you can view and download this information by using the search function located at http://www.sec.gov/edgar/searchedgar/companysearch.html.